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net.wars: Money makes the electrons go around

Of course, everyone always does. But the "they" in that sentence are the record companies, and the thing they want more money for is digital downloads. More, that is, than they want for CDs.

Now, let's think. Some of the costs of recording and distributing music remain the same whether the music is sold on a CD or digitally transmitted: studio time, session musicians, producers, engineers, marketing and publicity. Maybe the record company kicks in some money to help the band tour, and of course it has overheads such as administrative staff, talent-spotters, offices, and the legal beagles who vet the contracts artists sign to make sure they're sufficiently draconian. Royalties must be paid to songwriters whose copyright material is used.

From there, digital and physical distribution diverge.

Making physical CDs requires making a master from which the CDs can be pressed (it's only two-bit operators like me who burn CDs at home on a PC) and paying factories to produce mass quantities. Covers and liner notes must be designed and printed. The pressed CDs, printed covers, jewel cases, and shrinkwrap all must be packaged together. The CDs have to be shipped to warehouses, distributors, retailers. Each step has paper work, storage, and transportation costs. Every middleman gets a cut.

Selling files, though - obviously they must be stored on a computer system and backed up, and there must be sufficient bandwidth. Someone has to design and test the Web site. But these are shared costs, like the offices and talent-spotters, across all artists.

The other costs are borne by customers. If you want the files you download burned onto a CD you pay the costs of fixing them in that form. We aren't yet, that I know of, at the stage where someone downloading an entire album has the option of downloading cover art and liner notes and printing those out on a colour inkjet, but doubtless it's not far away.

So why does the digital form of N.E.R.D's album "Fly or Die" cost more in downloadable than in physical CD form?

Now, I know you're going to say, "Because they can do it." It's true, but that's not really a satisfactory answer. Nor is it satisfying to say, "Because the people downloading digital albums are early adopters, and we know they'll pay any amount if they think what they're doing is hot, new, and cool."

It's probably nearer the mark to say, "They don't want to cannibalise their existing business." Retailers are having a hard enough time without setting off a high-tech price war. And if you believe - as the record companies really seem to - that free downloads are the reason your revenues are dropping, then the notion that charging less for downloaded tracks than for their physical incarnation would also eat into those revenues. It's not true, of course, as a recent Harvard Business School/University of North Carolina study concludes. But it remains the passionate conviction of record executives, and one they have tried to get the rest of us to embrace.

Of course, if you really believe that file-sharing hurts sales - the International Federation of the Phonographic Industry said this week that recorded music sales were down 7.6 percent in 2003, the fourth year running that sales have declined -- there's only one course open to you. Sell the first copy for a price that pays back all the production costs and shared overheads, plus a reasonable profit. Anything you make from downloads or physical sales after that is gravy, and you no longer need to care whether files are shared or not.

The first sale of top-selling mass-market acts like Britney Spears would doubtless be auctioned off and won by some very rich person with questionable taste. Smaller, niche-market acts might have to get an advance commitment from a consortium of fans, which at least would take some of the gambling aspect out of record releases. Under such a regime, the big threat would be from disgruntled insiders seeking to damage the company: a stolen copy posted a day early would destroy the sale, since what fans would be paying for is the right to be first.

If you're a performer, however, a completely different course is open to you. Take an electron from They Might Be Giants, and give away recorded songs every day. Make live performances and your relationship with your fans - the things no one but you can do - the core of your business. Use those giveaways to build yourself a devoted audience who will turn out to see you whenever you tour and buy your CDs because they feel they have a daily relationship with you. In the days when radio airplay was the only way you could make that daily contact with fans, you needed the record companies to get you on the air. Now - maybe you don't.

Which is actually why those companies are so panicky: they are afraid they really might be an endangered species. And the more they raise prices in a way that's perceived to be unfair, the more that will be a self-fulfilling prophecy. Be careful what you're afraid of: you just might get it.